Japan Inc. faces choppy seas

The blueprint for proposed merger/joint venture plan has fingerprints of Japan's bureaucrats at Ministry of Economy, Trade and Industry (MEITI) all over it. Practically speaking, such business engineering makes little sense.

Separately, according to Nikkei, the three companies will spin off their chip manufacturing divisions and create a new entity focused on production. That joint venture will reportedly receive a huge capital infusion from a Japanese government-backed investment fund called Innovation Network Corp. of Japan (INCJ), and Global Foundries is reportedly expected to become a part of that joint venture.The Nikkei report is sketchy at best since none of the Japanese companies supposedly involved in the deal is talking.

The blueprint for such a complex merger/joint venture plan has fingerprints of Japan’s bureaucrats at Ministry of Economy, Trade and Industry (MEITI) all over it. Practically speaking, such business engineering makes little sense.

The plan may salvage the weaker players of the three (read: Fujitsu and Panasonic) to survive for several more years through government handouts. But the move threatens the potential winner of the three (Renesas Mobile) with a reduction to irrelevancy in the already very competitive mobile SoC market.

Let’s break down the proposed deal.

First, Japan’s semiconductor companies have already undergone a series of consolidations. Renesas merged with the chip division of Mitsubishi, then with NEC’s chip division in 2009.

Even now, Renesas is still sorting out all the assets it acquired through its various transactions. But Renesas made a strategic decision in 2010 to spin off Renesas Mobile, as a 100 percent subsidiary, solely focused on SoCs for the mobile business.

Meanwhile, for Panasonic, the handwriting has been on the wall for awhile. The Japanese consumer electronics giant may have had its moment a decade ago, as it developed its home-grown Uniphier LSI chips, originally designed as an engine for a host of the company’s own digital consumer electronics products. A good idea at the time, and the company indeed harbored ambitions of extending its chip business to external customers. But that plan has steadily faded as SoC power houses in Taiwan like MStar; and MediaTek have emerged in the last several years.

Late last fall, Panasonic announced its plan to shrink its semiconductor business by shedding about 1,000 employees and outsourcing chip production. Panasonic's internal IC consumption, which accounts for 50 percent of its total output, is expected to fall further as the company cuts back TV production. For Panasonic, which has been exploring ways to restructure its semiconductor business, the proposed merger plan with Renesas and Fujitsu must be a God’s send. Suddenly, it has a place to unload its fabs and engineers.

What’s ailing Fujitsu Semiconductor is the lack of a platform. Fujitsu remains primarily an ASIC company. It may excel in crafting great ASICs for domestic system buyers, but it has never been able to transform its business into an ASSP supplier. Again, the assets Fujitsu Semiconductor could bring to the three-way Japan Inc. chip joint venture remains unclear. Perhaps, more Japanese customers, like NTT Docomo. But surely not many global customers.

Even more mysterious is the proposed scenario of merging all three companies’ chip manufacturing units. How could the combined fabs dumped by the three companies become a viable chip production venture? And, precisely, what role will Globalfoundries play?

This whole maneuver of creating two separate JVs (one for chip design and another for chip manufacturing) could be simply a convenient way for the three companies to unload a lot of assets they no longer want – without being painted as “job-killing” villains in the Japanese society. (Layoffs and fab closures are particularly problematic in Japan)

But a lack of leadership, or an endemic case of indecisiveness (postponing the inevitable year after year), is costing the Japanese electronics industry dearly. Once the highest flying industry in the Land of Rising Sun, the electronics sector is now blindly huddling together — like orphans in a boxcar — with little idea of its future.

There is a Japanese saying: “If we cross the street (river, or whatever) together, there will be nothing to fear.” But right now, the view from the boxcar is pretty fearful, and nobody wants to cross the tracks.

"There is still a very big captive Japanese market, but the next battle could be battery/hybrid vehicles and Japan is unlikely to buy batteries from the USA when they have such big players in that market."
Interesting because I think Toyota is buying their batteries from Tesla for their upcoming plug-in hybrid Prius and all-electric Rav4. Japan and China build laptop batteries, and Tesla connects them up in a way that can be used in a car.
In any case, with each generation of IC, fabs become more and more expensive to build--billions of dollars. It is difficult to do the design and fab in one company because there are few designs that will have enough volumes to pay for the fab (Intel with its processors being the one exception). You can try to achieve this by combining companies, but it can be difficult to get the balance right.
So maybe they are taking the right approach.

I think Fujitsu make FPGAs for Lattice Semi. Take a printer apart and look at the chips inside. I took a Canon and Epson printer apart as they cost the same as ink (included ink), and I wanted to make some art statements. To go to Avnet for chips as a printer or camera manufacturer means you had no input into the SoC, which is unlikely to work in those highly competitive markets. Any US camera or printer manufacturers (or large TV manufacturers or any commodity electronics?). There is still a very big captive Japanese market, but the next battle could be battery/hybrid vehicles and Japan is unlikely to buy batteries from the USA when they have suck big players in that market. Might as well round them out with power electronics and SoCs as well as there seems to be some margin there. Avnet's shareholders would want to make more than they would allow the Japanese OEMs to make, so no need for greedy middlemen. As for a range of chips, look at TI and Freescale for divergent devices even with an ARM core.

Sony went south under the leadership of a westerner. I never worked in any consensus companies, but corporates in the West have leaders who think they have a direct connection to God and any suggestions that are not in line are seen as dissenting. How is HP doing with their CEOs? Think about the losses to shareholders and employers there. In fact, strong US leaders have been responsible for the collapse of Enron and a host of others.

Ultimately, it boils down to a cost issue. The cost of developing new processes, building and tooling new fabs, and what you can charge for the wafers you produce. Japan is an expensive place to do business and it is difficult to attract external business when competing with the likes of TSMC. It wouldn't surprise me that they consider a wide array of consolidation and/or JV opportunities to try and improve competitiveness.

Aggressive marketing may be another area. If semiconductor business of this merger closely work with Arrow, Avnet or other distributor, they may get very good market share and user can have easy access to this chips.

I'm not so attuned to this business side of the industry, but nothing about any of these plans for the future seems strange to me. In the global playing field, when (for example) the different fabs have a hard time surviving as separate entities, the natural reaction is to consolidate. As a first step. The next step might be to do what the US did, and use increasingly fabs from overseas.
As to companies like Sony, that's a different discussion. It seems to me that Sony just didn't jump on the digital bandwagon fast enough. But there's nothing unusual about that either. Sony had the Walkman, for instance, which in hindsight could have been morphed into a digital player like the iPod. Of course, the iPod has also had its day in the sun, and for now, it is the iPhone and iPad that make everyone giddy.
But these are all cyclic things. The more trendy, the shorter lived. You can bet on it. And this holds most especially for personal handheld gadgets. Who wants to be seen with yesterday's fashion accessory? Come now. No one should make the mistake of assuming that today's fashionable gadgets will last a day longer than yesterday's, right?
I see a Japan Inc. that is going through the same transitions as US companies, maybe delayed by a few years. And yes, it's certainly true, the design-by-committee prevalent in Japan is not always a good thing.

We hope not. Making Japan IC chips a captive market within it's systems division is essentially what they have now, and that market simply isn't big enough.
The new entity needs to create products it can sell to the *world* market to be viable.

Intellectually and strategically, it makes sense for Japan to combine Renessas, Panasonic and Fujitsu chip manufacturing into one entity. After all, it is difficult for individual companies (except Intel) to keep up with fab innovations due to costs. Organizationally, it seems it will be difficult...perhaps that is why they brought in Global Foundries into the deal. At best, it will take time to merge these manufacturing units effectively. I think this will make Japan IC chips more of a captive market within its own systems divisions. Steve Szirom, InsideChips.com.

I think many of us feel that this JVs won't work unless there is a strong leadership to shepherd the project. But if we are to go one level deeper, and pick things apart -- in terms of what Panasonic can offer; what Fujitsu has; and what Renesas can bring to the table, what do you see that you like? Are there any specific technologies, products and IPs does any of you want...or "must have"?